THE WALL STREET VERSION OF A GREEK TRAGEDY
I was in New York this week, and it didn't take long to find out what the current mood is among senior-type investment people: frustrated; very frustrated. Small-cap stocks, by any logical long-term fundamental measurement, are more attractive than big-cap stocks, and have been for some time -- yet the gap between them widens almost every day the market's open as more and more money is forced into index funds, especially their biggest components. (The Russell 2000's relative strength line fell to yet another new low this week, and the Russell is now down 5% on the year compared to a 5.6% GAIN in the S&P 500.) The apparently-logical stocks to own are thus performing abysmally, while the so-obviously-extended big-cap growth stocks, like the Eveready bunny, just keep going and going and going.
At this point, then, those of us who lived through the big speculative frenzy of 1968-69 (when I was at the Manhattan Fund) and the Nifty Fifty boom of 1972-73 (when I was at Putnam) can only shake our heads; we've seen these kind of things before, and know how they end, but they can take what seems like forever to actually end, and the "Janus Twenty" one obviously hasn't ended yet. (What's going to end it? Sorry; if we knew that, it would have already ended.) And so I heard, over and over again, something similar to "We know what's going on, and we know what's going to happen, but if we stay away from the big names and start underperforming our clients will take money away from us -- so we're compelled to play". It's a modern Greek tragedy.
Those of us who have been around a while can cite all sorts of anecdotal evidence that things are out of hand at this point. My current favorites:
* The P/E of the T. Rowe Price New Horizons fund P/E relative to the S&P 500 P/E is currently at an all-time low (the chart on the back page has a value of .92 at the end of last year; I heard somewhere, though, that the number's now down to .88) -- and the ratio has only fallen below 1.00 twice before, in 1976 and 1990.
* The Windsor Fund, which found it necessary to close to new investors in 1986 -- at a time when closing a fund to new investors was unheard of -- has earned considerably less than its full potential management fees in three of the last four years due to poor performance, and money is currently flowing out of the fund at a rate of $600 million/month.
* Bill Miller, the widely-followed value manager at Legg Mason, bought AOL and Dell in his fund.
And so the rubber band between the haves and the have-nots keeps stretching further and further and further -- and everyone who's been in this business for a while is acutely aware that it will start going back the other way again at some point, as every such previous trend has ultimately done. At the same time, everyone is also painfully aware that every attempt to anticipate the reversal thus far has been fatal from a performance standpoint, and nobody has any idea when -- and why -- the situation will finally change. And so grown men and women walk up and down the halls of major investment management shaking their heads, wondering just what is going to happen between now and the ultimate end of this financial Greek tragedy.
As I contemplate all this, two things come to mind. The first is the voice of a radio reporter who was stationed just a few blocks from the Texas School Book Depository in Dallas on November 22, 1963, to describe the Presidential motorcade as it proceeded through the city. When the procession finally got to him, though, it didn't come by at the sedate pace he expected, but at a shockingly fast speed. All the reporter could say, as the limousines whizzed past him and sirens wailed in the background, was "Something's wrong here; something's terribly, terribly wrong." The second is the scene towards the end of The Bridge On The River Kwai where William Holden is getting ready to blow up the bridge that Alec Guinness and his troops so carefully engineered and built for their Japanese captors; Guinness, discovering what is about to happen to his span, tries frantically to kill Holden and save the bridge. Another British officer, watching helplessly as his commanding officer tries desperately to kill Holden before the American commando can blow up the bridge, can only look at the scene before him in disbelief, shake his head, and mutter "Madness. Madness..."
That's just about all I can say, too, about the money currently pouring into the S&P 500 (it's actually concentrated more on the Janus 20 these days) to the exclusion of everything else -- because everyone else is doing the same thing -- and what is happening to both big and small stocks as a result: "Something's terribly, terribly wrong here", and "Madness. Madness..."
God help us all; those who don't know any better, and -- especially -- those who do.
-- Walter Deemer